Problem 16-2

Even programs involving relatively subjective judgments can readily be audited.

A Department of Housing and Urban Development (HUD) program is aimed at conserving and rehabilitating blighted but salvageable urban areas. One element of the program provides that HUD will make rehabilitation grants and low-interest loans to property owners to help them finance the repairs needed to bring their properties into compliance with housing codes.

When Congress authorized the program, it did not establish specific criteria as to what constitutes a blighted but salvageable area; it left that up to HUD.

A preliminary survey by the GAO has indicated that HUD is directing funds to areas that were far too deteriorated for conservation and rehabilitation to work.

Suppose that you are assigned to the engagement. Outline an approach that you would take to support (or reject) the findings of the preliminary survey.

Problem 16-3

Compliance testing may require auditor ingenuity.

The CPA firm of which you are a manager has placed you in charge of the audit of the Thornburg School District. The district receives substantial financial support from the State Education Agency. The state requires aid recipients to have annual single audits conducted by independent CPA firms. The firms are responsible for verifying that recipients have complied with the provisions of all financial awards from the state.

From your preliminary survey you learn that the district received an award of $3 million to provide free hot lunches to elementary school children of low-income families.

The award specifies that only children from families with incomes under $30,000 are eligible to participate in the program. The state requires districts to determine eligibility, but it provides no guidance on how they are to do so.

Based only on this limited information, it is obviously not possible to develop a specific audit program to ensure that the district has complied with the eligibility provisions. However, before you even meet with district officials to discuss the audit, you wish to have a preliminary strategy in mind.

As best you can from the limited amount of information provided, design a strategy to test compliance with the eligibility provisions.

Suppose that the audit was being conducted under the federal Single Audit Act and the auditors were required to adhere to all its reporting provisions. As part of your examination you found that 25 students out of 350 in the program failed to meet the eligibility requirements. Assuming that the auditors consider the amounts involved as indicative of a weakness in internal controls, how, if at all, should that finding affect your report on the program?